Budget 2013: Balancing Intent & Implementation

With the sluggish growth in GDP and the growing fiscal deficit, India Inc’s eyes are focused on the Finance Minister (‘FM’) and his upcoming Budget package. He would indeed be walking on a very tight rope whilst balancing between boosting revenue and minimizing tax burdens. A matter of urgent attention is the need to boost investor confidence and to achieve that, it is of utmost importance to bring certainty into the tax legislation and its administration. The gap between intent and reality only seems to be widening.

To this end, the FM needs to undo or attune certain amendments made in the last year’s budget. Last year, there were about 25 retrospective amendments. The one dealing with negation of the Supreme Court judgment in the case of Vodafone created a stir amongst investors and raised the basic issue of sanctity of the Indian judiciary system. In line with the recommendations of the Shome Committee, the Government should do away with the retrospective amendment totally or at least mellow it down by providing that the payer should not be held liable for failure to deduct tax, as it amounts to impossibility of performance on the part of the payer. Further, internal reorganizations and listed entities’ transfer of shares should be kept out of the purview of taxation of indirect transfers. Also, in line with Direct Tax Code Recommendations, indirect transfers should be taxed in India, only if the share/interest of overseas entity derives its value, directly or indirectly, from assets located in India, which must be more than 50% of the global assets.

Similarly, the retroactive amendment to include payments for standard off-the-shelf software within the ambit of ‘royalty’ imposes an arduous responsibility on the payers. It also puts various consequences for default in deducting tax, viz. interest, penalty and the disallowance of corresponding expenditure. It is worthwhile to relook at the provision and make it prospective in nature. Also, the Government should end the litigation surrounding dual levy of service-tax and VAT on purchase of standard off-the-shelf software.

The change in law stating that the possession, usage and location not relevant to constitute ‘royalty’ has unsettled previous law points. It also created ambiguity in relation to characterization of certain standard payments not involving human intervention, viz. telephone charges, leased line charges, access to web based documents, etc. This should be suitably modified to exclude such payments from its ambit.

The next contentious issue is withholding tax obligations on non-residents whether or not the non-resident has a place of business or business connection in India or any other presence. This has a wider application and creates administrative hassles for non-residents. This would result in unintended consequences and goes against the settled principle that income-tax law does not have extra-territorial application. With an already shaken investor confidence, additional compliance burdens coupled with unwarranted cash traps only adds to the misery. Hence suitable modifications are required to provide that the withholding tax obligations are applicable only if the non-resident has a taxable presence in India.

Cash flow also gets impacted on account of the various procedural issues involved in claiming service tax refunds. While this issue is unresolved, the recent notification mandating collection of demands despite pending appeals and stay petitions has added to the woes of the taxpayer and led to unwarranted litigation. Suitable guidelines in this regard are welcome so that the policy intent reconciles with ground realities.

The bane of compliance burden is also felt by companies required to comply with Domestic Transfer Pricing (‘DTP’) legislations although their transactions may be tax neutral. DTP is intended to debar tax leakages. Tax neutral transactions should be kept outside the purview of DTP to ease out administrative hassles. Further, adequate clarity on the benchmarking mechanism for payments like director’s remuneration and inter unit allocations is also welcome.

Overall, the need of the hour is to continue the positive gestures exhibited by the government in the recent past both in form and spirit through rationalisation of tax provisions and involving various stakeholders on policy decisions and taking a balanced approach to converge policy intent and implementation and restore confidence in the investors.